The Canadian life and health insurance industry has a final chance to make its case to alter new international financial reporting standards that it says will threaten key product lines, damage businesses and possibly affect the stability of capital markets.

Even though the insurance sector doesn’t have to comply with the contentious part of the new IFRS until 2013, there’s a sense of urgency because the most recent consultation period closes at the end of November.

Canada’s Accounting Standards Board had voted in 2008 to adopt the new IFRS. The standards are being phased in over several years, but some rules come into effect as soon as January 2011.

Representatives of Toronto-based Canadian Life and Health Insurance Association Inc. and executives of individual Canadian companies will meet representatives of the International Accounting Standards Board, which sets the IFRS, before the end of this month.

“We’re not going to miss any opportunity to make representations and to talk to people,” says Frank Swedlove, the CLHIA’s president. “I would think that at the end of the day, it will lead to changes. I believe it’s a strong enough case we’re making.”

The CLHIA has made six complaints about the IFRS, but the main concern is about how the IFRS would force insurers to account in the short term for the large portfolios of long-term fixed-income assets in their portfolios that are matched to liabilities from long-term guaranteed products.

Today, under Canada’s generally accepted accounting principles, the insurance sector uses what’s called a “risk-free rate” on the value of those long-term fixed-income assets. The IFRS would impose the “discount rate” on such assets — a much more conservative approach. Using the discount rate, the value of these assets would appear lower on an insurer’s books.

“The most important single problem for Canadian life insurers is the determination of the discount rate,” says a CLHIA’s memo submitted to the IASB in October.

At the centre of the argument for the revised valuation standard is that if any bond or long-term asset (such as infrastructure or real estate) were to become effectively illiquid — as was conceivable during the so-called “credit crunch” — an insurer would have to account for that in its quarterly reporting.

Says the CLHIA’s submission: “We submit, however, that in the case of long-term life insurance contracts, the proposed approach is in such radical disharmony with the underlying business model and with economic reality as to result in financial reports that will be neither relevant nor reliable, extremely difficult to explain and inconsistent among preparers and among industries.”

In simpler terms, Swedlove calls the accounting for the assets under the revised standard as unrealistic. He adds that the CLHIA’s further submissions to the IASB will include quantitative examples of how the new standard could affect Canadian insurers.

The bulk of the insurance business of Canadian life insurers is, by any measure, long term, says the CLHIA comment, with insurance contracts extending 20, 30, 40 or more years into the future.@page_break@The sector warns that forcing insurers to account for these kinds of liabilities in the short term is likely to cause volatility in their earnings reports and add cyclical volatility to the capital markets. The changes could reshape the sector and affect other parts of the capital markets, says the CLHIA comment, which argues that the capital cost of long-term contracts often sold in whole-life insurance products and annuities would be too high to maintain: “Consequences include … material weakening of long-term insurance guarantees, increases in their cost to the purchaser, or both. Possibly, their withdrawal from the market.”

The CLHIA submission even warns that the market for long-term financing for commercial mortgages, publicly traded corporate bonds and private-placement bonds could be reduced because the insurance sector simply would not use them as much, preferring shorter-duration instruments.

Toronto-based Manulife Financial Corp., in its Q3 2010 report issued at the beginning of November, released a statement echoing the lobbying efforts of the CLHIA — with its own potential warning to shareholders: “[The IFRS] could have significant unintended negative consequences on our business model, which would potentially affect our customers, shareholders and the capital markets. We believe the accounting rules under discussion could put Canadian insurers at a significant disadvantage relative to their U.S. and global peers, and also to the banking sector in Canada.”

Manulife is among the market leaders in many of the product categories with long-term guarantees that are under scrutiny as a result of the IFRS.

However, smaller insurance companies with less exposure to the products at risk are taking a slightly different stance.

“The standards are global,” says Neil Skelding, CEO of RBC Insurance Services Inc. in Mississauga, Ont. “And the fact that we have a lot of long-term products in our marketplace is unlikely to affect the standard globally.”

RBC Insurance has spent part of the past two years configuring its business to operate under the IFRS, says Skelding: “So, we’re spending time modelling that and looking at blocks of business and whether they’re sustainable or not, and now we can continue to evolve that book so the impact is lessened.

“I hope there [will] be concessions,” he adds. “But … one of the decisions we made early on was that the standards were coming and we need to configure ourselves accordingly.”

Swedlove admits his confidence in effecting change may be somewhat hopeful, given that the sector is up against an international body with many masters. Australia, Britain and European Union countries are already using the revised IFRS.

The IASB website says the board’s main goal is “to develop a single set of high-quality, understandable, enforceable and globally accepted international financial reporting standards.”

However, the IASB has been known to listen to issues raised by member countries, says Swedlove, adding that Canada has an ally in the U.S., which is considering adoption of the standards in 2011.

The U.S. insurance sector, after all, sells a similar range of long-term guaranteed products that could be affected in the same way. IE